KB Home Customers Find FTC Penalties Inadequate

[Guest guest]

KB Home Customers Find FTC Penalties Inadequate

Giant LA Builder Has Long History of Ignoring FTC Settlements

http://www.consumeraffairs.com/news04/2005/kb_homes.html

By H. Bosworth

ConsumerAffairs.Com

August 16, 2005

The recent penalty levied against KB Home by the Federal Trade

Commission for violating a prior agreement is the latest in a long

string of incidents associated with the Los Angeles home builder.

KB Home

• Consumer Complaints

---

News

• KB Home Customers Find FTC Penalties Inadequate

• KB Home to Pay $2 Million for Violating Home Warranty Agreement

Even as KB Home has reported net earnings of $480 million as of

November 2004, it has also faced continuing charges of poor building

procedures and deceptive lending practices from consumer action

groups and homeowners' associations.

In the words of frustrated homeowner Shanks, " We are left

being subjected to discomfort or paying for careless mistakes that

were not of our making, but that of KB Home and other builders like

them. "

Builder Behemoth

KB Home began as Kaufman & Broad in 1957, and has diversified into a

multi-tiered realty operation. Its home-buying operation services

most of the western and southern United States, and it is a major

commercial real estate developer in France through its Kaufman &

Broad S.C. subsidiary.

KB Home's prime market is the new home buyer, specifically for

professionals and workers with families, generally in medium-sized

developments close to major metropolitan areas.

The company offers assistance for first-time buyers through its KB

Homebuyers program, and boasts an exceptional rating for customer

satisfaction from J.D. Power and Associates.

KB Home's chairman, Bruce Karatz, is considered the second-highest-

paid CEO in Los Angeles with earnings and bonuses of $38 million for

2005. Karatz attributes the success of his company to a disciplined

business model and " strict cost monitoring. "

In an interview with Boston University's Bostonia magazine, the 1967

alumnus stated that " Subcontractors show up only when there's work

to be done. "

" Box of Crackers "

Meanwhile, disgruntled KB Home buyers complain of faulty

construction, failure to provide customer service, miscalculated or

ignored escrow charges, and contracts that deny buyers their rights

to lodge complaints or sue.

Many angry homeowners have taken to the Web to protest, using sites

like KB Homes Suck and KBHomeStink to tell their stories.

KB Homes Suck contains video clips of families touring their homes,

showing mold on the walls, poorly built doors, leaky roofs, and

water damage. One young Texan woman compares the quality of her new

house to a " box of crackers. "

The sites are filled with horror stories from first-time homeowners,

including one young married couple whose new house flooded four

times and has suffered continual structural problems.

" The poor quality, material and craftsmanship used by KB Home to

build our house has left us very upset and worried about the safety

of our family in this home, " they said.

Lawrence Gotlieb, VP for Government and Public Affairs at KB Home,

did not return telephone calls seeking his response to the

homeowners' complaints.

Binding Arbitration

Another frequent complaint levied against KB Home is its use of

arbitration to settle customer grievances. Arbitration has become a

common process in many real estate and financial fields, and binding

arbitration -— the form used by KB Home -— places an injunction

against both parties and prevents them from seeking redress

elsewhere if they disagree with the arbitrator's result.

Disgruntled KB Home homeowners say the company works with

arbitrators that nearly always rule in its favor.

In 1979, KB Home entered into a consent agreement with the Federal

Trade Commission, which had filed a complaint charging the company

provided inadequate repairs under its warranty and employed

deceptive advertising to lure homebuyers.

Under the consent agremeent, KB Home agreed had to provide mandatory

binding arbitration to resolve disputes, but agreed that homeowners

would be free to seek legal recourse if they were not satisfied with

the arbitration result.

Despite this, KB Home continued to insert arbitration clauses into

its contracts that mandated homeowners utilize arbitration to solve

disputes, and requiring that they pay the costs themselves, an

option placing arbitration out of the reach of many cash-strapped

Americans.

In 1991, the Department of Justice filed a complaint against KB Home

for violating the terms of the 1979 agreement, and KB Home settled

for a $595,000 fine and a permanent order to uphold the original

agreement.

Since then, homeowners' rights groups such as Homeowners Against

Deficient Dwellings (HADD) have charged that KB Home continued to

use binding arbitration in violation of both the 1979 and 1991

agreements, particularly by offering two types of warranties for

buyers -- a ten-year warranty without an arbitration clause, and a

twelve-year warranty that included one.

HADD President Seats stated that, " Most people will go for the

twelve-year agreement without looking at what's really in it. "

Pocket Change

The August 3, 2005 settlement of FTC charges mandates that KB

Home " modify the dispute resolution provisions of existing

warranties to comply with the 1979 order. "

According to one FTC attorney, " KB must offer new home buyers the

option for mandatory non-binding arbitration. If a home buyers

decides they do not want to use arbitration, they can have the

opportunity to go to court. "

The FTC also ordered KB Home to reimburse homeowners' costs of

seeking arbitration and to pay $2 million to settle the dispute.

In addition to the FTC fine, the Department of Housing and Urban

Development (HUD) found that KB Home's former mortgage division, KB

Home Mortgage Company, had engaged in poor underwriting practices,

such as overstating buyers' income to qualify for loans.

KB Home agreed to settle the dispute for $3.2 million, the largest

settlement of its kind for HUD, in July of 2005. By that time, KB

Home had sold its mortgage division to Countrywide Home Loans in

June of 2005.

Seats called the settlements " inadequate, " noting that KB Home

stated that the settlements would not affect their bottom line.

" Bruce Karatz could pay those costs out of his checking account and

not miss a thing, " said Seats.